Transcript ch04

Chapter 4 Developing an innovation strategy

© 2009 John Wiley & Sons Ltd.

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CONTENTS

• • • Introduction Elements of corporate innovation strategy Conclusions 2

1. INTRODUCTION

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1.1 Innovation Strategy

Session 4 outline: • • • • •

Limitations of the rational planning approach to strategy Positions - national systems & competitors Paths - competencies & opportunities Processes - specialization versus integration Identifying & sustaining capabilities

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1.1 Innovation Strategy

• Four factors have a major influence on the ability of a firm to develop and create value through innovation:

The national system of innovation in which the firm is embedded, and which in part defines its range of choices in dealing with opportunities and threats.

Its power and market position within the international value chain, which in part defines the innovation-based opportunities and threats that it faces.

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Innovation Strategy

• • Four factors have a major influence on the ability of a firm to develop and create value through innovation:

The capability and processes of the firm, including research, design, development, production, marketing and distribution.

Its ability to identify and exploit external sources of innovation, especially international networks.

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1.2 Choice of strategy

• • Choice of strategy (& luck) are more important than industry:

choice of industry 8.35% choice of strategy 46.4%

parent company 0.8%

unexplained (e.g. luck) 44.5% % total profitability explained. Source: Richard Rumelt “How much does industry matter?”, Strategic Management Journal, 1991, 12, 167-186

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1.3 Demands of Innovation Strategy

• • • Key demands of innovation strategy:

to develop firm-specific knowledge & capacity to exploit it to cope with environmental complexity & uncertainty to create organizational structures & processes to manage trade-offs between specialized & broad knowledge

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1.4 Strategic Management

Two distinct models of strategy: Rational/Planning

top-down outside-in

Resource/Capabilities based

bottom-up inside-out choice ahistorical static variation & selection cumulative dynamic/learning

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• • • •

1.4.1 Limitations of rational planning

Limitations of the rational planning:

Focus on with competitors, not customers Difficult to identify internal strengths & weaknesses e.g. oil firms & 'energy'; computer firms & 'information’ Strategic objectives do not match internal capabilities The environment is often complex & uncertain e.g. multi-media industry

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Strategic Management

Rational planning approach ignores constraints: • • • •

Size & resources of the firm Existing product & technological base Technological opportunities for innovation Market opportunities for innovation

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1.5 Competitor Analysis

Example: Five 'forces' analysis of competitive environment: • rivalry amongst existing competitorsthreat of new entrantsthreat of substitute products & servicespower of supplierspower of customers © 2009 John Wiley & Sons Ltd.

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Competitor Analysis

• • • • But innovation affects all five forces:

rivalry - basis of competition, industry boundaries new entrants - raise or lower entry barriers substitutes- relative price/performance, new products customers & suppliers - switching costs, relative power, vertical integration

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1.6 Blue Ocean strategy

• • • • Concept of Blue Ocean strategies, compared to traditional strategic thinking, or Red Ocean strategies:

Create uncontested market space, rather than compete in existing market space Make the competition irrelevant, rather than beat competitors Create &capture new demand, rather than fight for existing markets and customers Break the traditional value/cost trade-off: Align the whole system of a company's activities in pursuit of both differentiation and low cost

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2. ELEMENTS OF CORPORATE INNOVATION STRATEGY

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COMPETITIVE AND NATIONAL POSITIONS TECHNOLOGICAL PATHS ELEMENTS OF CORPORATE INNOVATION STRATEGY ORGANIZATIONAL AND MANAGERIAL PROCESSES 16

Key factors in innovation strategy: •

position of the firm - technologies, processes & products compared to competitors

paths open to the firm, given its competencies & emerging opportunities

processes to integrate & exploit competencies within & between firms

Source: Teece & Pisano © 2009 John Wiley & Sons Ltd.

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2.1 Positions - national factors

National factors influencing competencies: • • • •

input prices natural resources local buyers tastes public & private investments

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2.1.1 Positions – Emerging Economies

• • • • Firms in emerging economies may pursue different routes to upgrading through innovation:

Process upgrading – incremental process improvements to adapt to local inputs, reduce costs or to improve quality.

Product upgrading – through adaptation, differentiation, design and product development.

Capability upgrading – improving the range of functions undertaken, or changing the mix of functions, for example, production versus development or marketing.

Inter-sectoral upgrading - moving to different sectors, for example, to those with higher value-added.

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2.1.2 Positions - competition

• • • • Assessing competencies of competitors:

How do they compare in terms of size & composition?

How efficiently are they exploited?

How effectively do we learn from their knowledge & experience?

How do we differentiate, develop & maintain our innovation advantages?

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2.2 Paths - time horizons

• • • Level, time & focus of innovation strategy:

Business unit - 2-3 years - improving cost & quality, new product & service development Group/division - 5 years - positioning & exploiting synergies across business units Corporate - 10 years - environmental scanning & competence-building

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2.2.1 Paths & Processes - capabilities & innovation

Products & services Processes Capabilities Competencies Resources/assets 22 © 2009 John Wiley & Sons Ltd.

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2.2.2 Paths - capabilities & innovation

Innovation & strategic positioning: • • • • • •

pioneering technology, processes, products accumulated tacit knowledge complexity complementary assets standards patents

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2.2.3 Paths - capabilities & innovation

Characteristics of competencies: •

firm-specific

significant benefit or value to customers

take time to develop

sustainable as difficult to imitate or acquire

unique configurations of resources

strong tacit content & socially complex

Source: Hall (2000) © 2009 John Wiley & Sons Ltd.

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2.3 Processes - Knowledge

Key organizational issue is how to balance conflicting requirements: • •

to identify & develop specialized knowledge within technologies & markets to exploit this knowledge by integrating across technologies & markets

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2.3.1 Processes - Innovation

• • • • Process of strategy formation:

given uncertainty, explore implication of a range of possible futures encourage the use of multiple sources of information, debate & scepticism ensure broad participation & informal channels of communication plan to change strategy in the light of new & unexpected evidence

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2.3.2 Processes - Resource Allocation

• • • • • Resource allocation under uncertainty:

encourage experimentation, risk-taking & incrementalism apply different criteria for different types of project use simple, transparent criteria make rules for termination explicit identify & plan for uncertainties

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2.3.3 Innovation Process

• • Generic phases of the innovation process:

Searching & scanning the internal & external environments Filtering & selecting potential opportunities

acquiring the technical, financial & market

resources

implementing development & commercialisation

reviewing & learning from experience

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2.3.4 Innovation Process

• • • • • Factors affecting the precise process:

Sector - competitors, structure & constraints Markets - opportunities & rate of change Technology - maturity & costs Resources - firm & networks Location - regulation, policy & systems of innovation

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3. CONCLUSIONS

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3.1 Decision-making under Uncertainty

So, Innovation: Response or strategy?

• “. . . chance favours only the prepared mind”, L. Pasteur, 1854 • “...the more I practice, the luckier I get…”, Gary Player (champion golfer) © 2009 John Wiley & Sons Ltd.

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3.2 Being the first

• • • • • • • Advantages of being first to market:

reputation as a pioneer capture market share early learning curve benefits definition of standards establish entry barriers eg patents dominate supply & distribution chains earn ‘monopoly’ profits

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• • • • • Disadvantages of being first to market:

pioneering costs, educating buyers, regulatory approval demand uncertainty changing buyer needs low-cost imitation followers ‘leapfrog’ technology

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3.3 Conclusions: Innovation Strategy

• • • Conclusions and implications from observation and research:

The elements national systems of innovation interact to influence the degree and direction of innovation in a country.

The uneven global distribution of innovation demands global search strategies for the development & commercialization of innovation.

The position of a firm in an international value chain will constrain the opportunities for innovation and entrepreneurship.

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Conclusions: Innovation Strategy

• • Conclusions and implications from observation and research:

National context influences, but does not determine the rate and direction of innovation at the firm level. Dynamic capabilities and firm-level processes contribute to the development and growth of firms.

Sources: J. Bessant & J. Tidd (2007) Innovation and Entrepreneurship (Wiley); J. Tidd (2006) From Knowledge Management to Strategic Competence (Imperial College Press, 2 nd edition); J. Tidd, & J. Bessant (2009) Managing Innovation: Integrating technological, market & organizational change (Wiley, 4th edition); S. Isaksen & J. Tidd (2006) Meeting the Innovation Challenge: Leadership for Transformation and Growth (Wiley). © 2009 John Wiley & Sons Ltd.

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